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When you contribute to a company pension (known as bAV or betriebliche Altersversorgung in Germany), you benefit from immediate tax and social security savings. This article explains how these savings work, with examples and tables to make it easier to understand.
What Are Tax and Social Security Savings?
When an employee contributes to their company pension, a portion of their gross salary is redirected into the pension fund. Because this portion is taken from the gross salary (before taxes and social security deductions), it reduces the employee’s taxable income. This results in both tax savings and social security savings.
How Much Can I Save on Taxes and Social Security Contributions?
In Germany, contributions to the company pension are tax-free and social security-free up to certain limits. Here’s a general breakdown of the tax and social security savings:
Tax Savings: By contributing a portion of your salary to a company pension, you lower your taxable income, which means you pay less in income tax.
Social Security Savings: Contributions to the pension are also exempt from social security contributions up to a set limit, reducing costs like health insurance, unemployment insurance, and pension contributions.
Example Calculation of Tax and Social Security Savings
Let’s look at an example to illustrate these savings:
Scenario:
Gross Monthly Salary: €3,500
Company Pension Contribution: €200 per month
Combined Tax and Social Security Rate: 40% (for simplicity)
Calculation Steps:
Without Company Pension Contribution:
Taxable Income: €3,500
Taxes & Social Security (40%): €1,400
Net Income: €2,100
With Company Pension Contribution of €200:
Taxable Income: €3,500 - €200 = €3,300
Taxes & Social Security (40%): 40% of €3,300 = €1,320
Net Income: €1,980
Savings Summary:
Contribution to Company Pension | Taxable Income | Taxes & Social Security | Net Income | Monthly Savings |
€0 (No Contribution) | €3,500 | €1,400 | €2,100 | €0 |
€200 Contribution | €3,300 | €1,320 | €1,980 | €80 |
In this example, by contributing €200 to the company pension, the employee saves €80 per month in taxes and social security contributions. This means the actual cost to the employee is only €120, while €200 is invested into their pension.
Annual Savings with Company Pension Contributions
Here’s how the tax and social security savings add up over a year with different contribution amounts:
Monthly Pension Contribution | Annual Pension Contribution | Annual Tax & Social Security Savings |
€100 | €1,200 | €480 |
€200 | €2,400 | €960 |
€300 | €3,600 | €1,440 |
Frequently Asked Questions
1. Why do I save on social security contributions as well?
In Germany, contributions to certain types of company pensions are exempt from social security up to specific limits. This exemption reduces your overall social security payments, saving you money immediately.
2. What happens if I contribute more than the limit?
Any amount above the tax-free limit is fully subject to income tax and social security contributions. It’s important to consult your HR department or a tax advisor to understand these limits for optimal contributions.
3. How does this benefit me long-term?
Tax and social security savings mean you can build retirement savings more cost-effectively. By deferring taxes and contributions, you maximize your monthly income now, while growing a retirement fund that will pay out later in life.
Key Takeaway
Contributing to a company pension is a highly tax-efficient way to save for retirement in Germany. By reducing both tax and social security payments, employees can boost their retirement savings at a lower personal cost. Understanding these savings and planning contributions within the allowable limits can help you maximize the financial benefits of a company pension.